32. Payday loans are designed to be short-term
loans for unexpected expenditure to tie people over until pay
day. As we have already highlighted, payday loans have been one
of the main subjects of concern in evidence to us.

33. Figures from Consumer Focus indicate that
the payday loans market increased from 0.3 million borrowers in
2006 to 1.2 million in 2009 to 1.9 million in 2010.[46]
The concern is that as the market grows so will the problems associated
with it.[47] Citizens
Advice give advice to 2 million people a year and they have found
that of those people the number who have payday loans has gone
up fourfold in the last couple of years. The Consumer Credit Counselling
Service (CCCS) told us that, of the 400,000 people a year it advises,
one in eight now had a payday loan.[48]
Ms Elson from Money Advice Trust said:

We started collecting data on payday loans a year
ago when they started to become an issue; we were getting 200
calls a month then, and it is over 1,000 calls a month now.[49]

34. The OFT described a similar picture of complaints:

Alongside this growth [in the number of payday lending
companies], we have seen an increase in reported consumer harm,
particularly over the last 12 months. The overall level of complaints
to the Financial Ombudsman Service about payday lending is low,
relative to some other products, but increasing. We understand
that 81 complaints cases were completed or closed between January
and November 2011. This is an increase of 72% over the same period
last year, and the rate of increase in complaints upheld is 171%.
In addition to this, since 1st January 2011, there remain 180
open complaints about the sector. By way of comparison, completed
or closed cases about the home credit sector are decreasing (by
26% this year) with a 50% decrease in the number of complaints
upheld. Complaints to Consumer Direct have shown a greater increase,
from 700 complaints in 2010 to 1535 complaints in the first eleven
months of 2011. We are seeing similar patterns in complaints passed
to us by debt advice agencies.[50]

35. These experiences were also backed up by
a recent report by R3, the trade body of the insolvency service,
which worryingly found that:

3.5 million British adults
were considering taking out a payday loan over the next six months;

Of those sampled who took out a payday loan,
60% regretted the decision and 48% believed the loan has made
their financial situation worse; and

Only 13% believed their payday loan had a positive
impact on their finances.[51]

Who uses payday loans?

36. Dr Gathergood, an economist at the University
of Nottingham, defined the market as being used by two types of
people:

i. people who have had a financial shock and
need money quickly to address that, who intend to repay, will
be in a position to repay and need the money now, a payday loan
can act as a high cost but effective form of insurance; and

ii. people who lack control in their expenditures
and might take out debt in order to purchase something they want
at short notice without an ability to repay, a payday loan is
an opportunity for them to be a victim of their own behaviour.

37. Dr Gathergood suggested that payday lenders
were keen to associate themselves with the former group, who need
short-term credit to meet a specific need. However he cautioned
that by providing such loans payday lenders were "opening
themselves up to a client base who might be more impulsive and
make poor use of credit".[52]

38. When they came before us, payday loan companies
explained why they believed their client base was widening. Caroline
Walton, of Dollar Financial representing the Moneyshop, noted
that increasing numbers of people were using payday loans "as
an alternative to going into unauthorised overdraft", and
that an increased awareness of this alternative form of lending
was directing people away from "borrowing long-term higher
values or borrowing in the unauthorised overdraft arena".[53]
Ms Walton went on to assert that:

People are seeing a real, viable choice between the
alternatives that they have had and what they could get today
from a payday lender, so I would not suggest that desperate times
have driven people to a payday lender. Incomes that are being
constrained, people on pay freezes, overtime being cut and fluctuating
pay packets mean that people have made an alternative choice.[54]

Regulation

39. Martin Lewis of moneysavingesxpert.com argued
that the absence of regulation over payday loans was a key factor
in the expansion of activity in this sector, and that the United
Kingdom was "the only wild west for payday lenders"
and "a crock of gold at the end of the rainbow for payday
lenders who have been shut down all over the world and have been
regulated".[55]
He went on to assert that "this is a massive growing problem
that is only going to get worse unless there is some form of radical
and quick intervention".[56]

40. However, the Minister did not recognise this
description of the sector and pointed out that the OFT regulated
the sector under the Consumer Credit Acts.[57]
John Lamidy from the Consumer Finance Association (CFA), one of
the trade associations representing payday lenders, also argued
that payday lending was regulated "in exactly the same way
as all other consumer credit lending" and included requirements
for companies to "provide the pre-contract information, the
right of withdrawal and all the things that everybody else has
to do".[58]

41. As was discussed earlier, the OFT currently
has responsibility for the payday loans market in respect of issuing
credit licences and in monitoring compliance with its guidance
on responsible lending. However, adherence to that guidance is
seen by consumer organisations as an area of concern. Consumer
Focus told us that "firms do not obey the rules such as they
are" and thought this was partly because payday lenders now
had too big a share of the high cost credit market to supervise.[59]

42. Citizens Advice agreed and highlighted the
main areas of non-compliance as being in the use of rollovers,
credit checking and the handling of debt. It concluded that payday
lenders were "not all in full compliance with regulatory
guidance on handling customers in financial difficulty".[60]

43. When questioned the OFT highlighted its two
key areas of concern with payday lenders. The first was around
transparency and in particular the need for consumers to understand
properly, the products they are buying:

It is not a market in which consumers shop around
a lot, and we are keen to be sure that they understand what they
are buying, what they are getting, what the terms arethat
they can compare the cost of products, particularly the total
cost of credit.

The second issue was related to credit checking as
well as the consumer's understanding of whether the loan was affordable:

We are concerned about whether, in those quick turnarounds
in particular, consumers are being given adequate explanation
of what they are getting and whether the lender is assessing the
affordability of the credit that is being granted and whether
it will push the consumer into unaffordable levels of credit.[61]

44. We were pleased to hear that the OFT will
be carrying out a compliance review of payday loan companies early
in this year. In view of the rapid proliferation of payday loan
companies, the Government will need to act swiftly to counter
any evidence of non-compliance reported in the OFT's review.

Rolling over loans

45. A key concern with payday loans is the way
in which they are used. Citizens Advice argued that while they
were intended to be short-term, small-value borrowing to get a
borrower to the end of the month, the reality was that providers
were "rolling over loans and people never get to pay them
back".[62] R3's
research found that a third of those who took out a payday loan
could not pay it off, so had to get another one.[63]
Citizens Advice also highlighted that consumers were using the
loans to pay off other debts.[64]
Joanna Elson from Money Advice Trust agreed with this assessment:

There is a process where you can roll over the loan
for a short period of time. Every time you roll it over, of course,
you have an additional charge. That is where people get unstuck.
They do not realise that, very quickly, they are into a big spiral.
If they use it for the purpose that perhaps it was intended, which
is a stop-gap, once, that is fine. If that is not understood,
and it is used in the way that many people are now using it, it
can definitely exacerbate things.[65]

46. Consumer Focus explained that rolling over
or taking out a loan five times, represented "a long-term
credit facility" and therefore was not a suitable service
to buy from a payday provider. Its research pointed to the fact
that the average number of loans that consumers have in the payday
loan market was 3.2 and that urgent action was needed to avoid
this figure from getting worse.[66]

47. The rolling over of loans was also recognised
by commercial debt management companies. They found that payday
loans were exacerbating the debt problem because borrowers were
using them in the short term to pay off debts rather than dealing
with the root causes of their debt problems. This resulted in
consumers getting into more debt before seeking help. Chris Davis,
representing MoneyPlus Group, said that his company was now seeing
a greater proportion of consumers who had "gone to a payday
lender and perhaps rolled over and then gone to another payday
lender".[67] John
Fairhurst from Payplan also saw this as a serious concern. He
told us that Payplan had seen cases where clients had "an
excess of 20 payday loans" and that they had been using payday
loans as "a way of managing [their] deficit budget".[68]

48. The evidence we heard has left us in no doubt
that the Government must act to limit the rolling over of loans
in its review of this sector.

CAP ON TOTAL COST OF CREDIT

49. Various consumer groups have been campaigning
for a cap on the total cost of credit to prevent payday loans
from spiralling out of control especially through rollovers. Martin
Lewis argued:

If I were doing this, I would put a total cost cap
on. I would talk to the decent players out there about what the
total cost cap should be. I would make them portray total cost,
which includes all possible fees, which they do not do right now.

As a concept, if you borrow £100, you should
never have to pay back more than £150. That is roughly how
I would do it; I would base it on cost. Do not take the £50
as my limitthat is conceptual. That would incorporate any
number of rollovers, which would be effectively a ban on the number
of rollovers going on.

However, he warned that there also needed to be a
way of preventing consumers who had reached their limit with one
lender and were unable to pay it offthen going on to another
lender to borrow to pay off their first loan thus creating a "personal
rollover".[69] Consumer
Focus said that consumers were already "borrowing from here,
there and everywhere, [...] robbing Peter to pay Paul."[70]

50. Despite a large number of responses to the
Government's consumer credit review calling for a cap on the total
credit that could be charged, the Government said that there was
a lack of hard evidence about the impact that the proposal would
have. It has therefore commissioned the University of Bristol
to carry out research into this area. The Government highlighted
that other research had shown that price controls, such as a limit
on APR, could restrict availability of legal credit to low income
consumers and push them to loan sharks.[71]

51. However, there is already positive research
available for the Government on the total cost of credit cap.
A report by the Centre for Responsible Credit highlighted the
situation in Ontario, Canada where there is a cap of $21 per $100.
The Ontarian Government carried out huge amounts of research before
putting this into placethrough the Maximum Total Cost of
Borrowing Advisory Board. It consulted with industry, social,
poverty, consumer and financial groups and other experts. It also
considered the experience of other jurisdictions with a payday
lending marketplace including the review of materials on payday
lending across Canada, in the United States and overseas. In addition,
the Board commissioned its own research from Ernst & Young.[72]

52. We do not see the need for Government to
commission research, with all the associated costs, from the University
of Bristol on the capping of total credit costs given the amount
of evidence and research available on the Canadian and US market.
If Government continues to believe that new research is necessary,
it will need to set out which specific areas lack existing data.

CREDIT CHECKS

53. The OFT has described credit and affordability
checking as a key part of being a responsible lender and stated
that companies which did not carry out appropriate affordability
assessments were falling foul of its guidance.[73]
Despite this clear view, a number of our witnesses asserted that
not carrying out credit and affordability checks was a regular
practice of payday lenders. Consumer Focus claimed that some of
the payday loans companies were even advertising that there would
not be a credit check for loans. As well as not carrying out credit
checks payday lenders were also not registering their loans. Sarah
Brooks, representing Consumer Focus, said that non-recording was
"fairly commonplace practice among the payday loan market".[74]

54. Martin Lewis agreed that credit checking
was a problem with payday providers and argued that given the
fact that there were only three main companies which operated
credit checkingCall Credit, Equifax and Experianit
was not very difficult for regulators to check which companies
were not recording loans.[75]
Consumer Credit Counselling Service (CCCS) informed us that the
data coming into its social policy team raised questions "about
the level of credit checking that goes on" and why individuals
who were struggling to repay their debts were still able to get
payday loans.[76]

55. The Consumer Financing Association (CFA),
one of the trade associations representing payday lenders, argued
that a factor in non-reporting by payday loan providers was that
the current credit reference agencies were unable to capture the
payday sector of the market because "they were built up on
mainstream lending and their data is normally only refreshed once
a month. That is not good enough for us, because the whole length
of the loan may only be a month".[77]

56. Some American states have a real-time central
database where payday lenders are required to enter the details
of all loans they provide within their state into a database,
and to check a borrower's status on the database prior to granting
a loan. This allows for a limitation on the number of payday loans
that can be obtained at any one time to be enforced, and prevents
borrowers from taking out loans from multiple providers at the
same time.[78] Veritec,
an American firm which had been working in the payday loans market
in the USA for over a decade argued that such a database enabled
regulators in USA to effectively enforce regulation of payday
lending by providing real time intelligence that delivered an
accurate and up-to-date view on market data and lender/borrower
behaviour.[79] This is
a key factor missing from the UK credit reference agencies as
the CFA explained it was only updated monthly.

57. There is a general lack of data in the payday
loans industry in the UK. The OFT said that they did not routinely
collect data on the payday loans market.[80]
The Centre for Responsible Credit's recommendation from October
2010 that the payday lending industry should provide independent
academic researchers with access to payday customer data to help
understand the industry[81]
had been ignored.[82]
This has meant that the UK's understanding of the sector lags
significantly behind the USA and Canada and the UK has to rely
on information from abroad.[83]
However, we note that the Government has recently asked the OFT
to start collecting data.[84]

58. It is clear that credit checking is a key
factor in ensuring appropriate lending to consumers. We are therefore
deeply concerned with the evidence that payday providers are not
recording all of their transactions. Examples of credit databases
that do capture payday lending are available in other countries
and we recommend that the Government require industry to introduce
similar models in the UK as a matter of urgency.

59. In addition we further recommend that payday
lenders be required by law to record all loan transactions on
such a database so that consumers' credit histories can be accurately
monitored. We further recommend that the Government explores how
this mechanism can be used to limit the practice of switching
between payday loan companies and the subsequent rolling over
of loans.

THE FLORIDA EXAMPLE

60. The Centre for Responsible Credit (CFRC)
recently published a report on the international experience of
regulation for payday loans[85]
highlighting the example of Florida. In 2001, Florida implemented
new regulations on payday lending that stipulated a maximum loan
sum of $500, limited transaction fees to $10 (in effect a cap
on the total cost of credit), banned rolling over, restricted
loan terms to a maximum of 31 days, and imposed a cooling-off
period of 24 hours between loans. In addition, Florida maintains
a real-time database of all loans.

61. This example was highlighted during the backbench
debate on 1 December 2011. Yvonne Fovargue MP said that:

Evidence from Florida shows that capping the total
amount that people can take out in any one periodfor example,
$500 in a yearimproves their ability to pay back that loan.
We asked whether that sent people into the hands of illegal lenders,
but we were told that the average amount that people take out
in loans in Florida is $388, which is quite a bit below the $500
limit. People do not max out their loans, which may mean that
they do not go anywhere else.[86]

Nic Dakin MP also highlighted the success of the
Florida model:

Interestingly, by 2009, 6.8 million loans had been
authorised in Florida, and not a single loan was extended beyond
the contract period. More than 90% paid back their loan within
30 days and more than 70% repaid on the contract end day. Consumer
complaints of mis-selling dropped significantly, as did overall
indebtedness, and not one borrower was indebted by more than $500
at any given time.[87]

62. The evidence from Florida also suggests that
regulation and capping of credit does not lead to the closing
down of the payday loans industry; thereby restricting access
to credit and pushing people to illegal lenders as suggested by
the OFT as being a risk. In fact since the regulations were introduced
Dollar Financialrepresented in the UK by the Moneyshopbought
into the Florida market acquiring 23 stores in 2006 and a further
82 in 2007. The company even described the regulatory environment
as 'favourable'. And yet at the same time its UK representative,
Caroline Walton, who met us, only mentioned the negatives of regulation
"certainly in the US there have been rate caps, which have
meant that payday lending has been closed down in certain states".[88]
She went on to suggest that regulation would be "a rather
rash" response and that rather than solving problems with
the payday industry it would drive out payday lenders and make
"it far less competitive".[89]

63. The CFRC highlighted research on Florida
by the University of Massachusetts which indicated that despite
regulation the payday loans industry was "flourishing"
and growing rapidly in terms of the number of customers and number
of transactions.[90]
CRFC conclude that:

This evidence flatly contradicts the arguments that
caps on the total cost of credit or other restrictions, such as
in respect of the number of rollovers allowed will result in a
contraction of payday loan availability.[91]

64. We recommend that the Government studies
the Florida example to see what lessons can be learned for the
UK market on successful regulating of the payday loans market.

Use of continuous payment authority

65. A continuous payment authority is similar
to direct debit because payments are taken from an account which
is linked to a credit or debit card and the company has control
over how much is debited and when. However, the difference is
that a continuous payment authority is not covered by any bank
guarantee and can only be cancelled directly with the business
that holds the authority. Consumer Focus told us that payday lenders
which use continuous payment authorities can "keep dipping
in" to a customer's bank account even when they are experiencing
difficulties in repaying the loan.[92]

66. Vivienne Dews Executive Director, Credit
Group, OFT said that a distinction needed to be made between acceptable
and unacceptable use of a continuous payment authority:

If a continuous payment authority is used correctly
simply as a means of making the agreed repayments, we do not have
an issue with that. We do have an issue if it is used improperly
to take money at times when it has not been agreed and without
proper authority. We draw quite a distinction between proper use
of it and improper use of it. [93]

David Fisher, Director of the Credit Group at the
OFT confirmed that the OFT was aware of concerns about the misuse
of the continuous payment authority, in particular:

Creditors dipping into your bank account, sometimes
many times in the day, and taking out sums of money that they
may not have agreed with you and at times that you might not have
agreed.[94]

Vivienne Dews, defined this as an 'unacceptable practice'
which was made clear by the OFT Debt Collection Guidance. However,
she also informed us that the 'definition' of 'unacceptable' had
been challenged by the industry, and as a result the OFT would
be launching a short consultation on the continuous payment authorities.[95]

67. Whilst we recognise that although the use
of continuous payment authority is legal in the payday loans market
its use must be carefully monitored. We welcome the OFT's consultation
on this matter and recommend that clear rules be put in place
to outlaw companies accessing funds without prior agreement. We
further recommend that the Government make clear to payday loan
companies that if they do not demonstrate a commitment to moving
away from the continuous payment authority as the method for receiving
payments, the new regulator will be asked to address this matter
as a priority.

Consumer credit code of practice

68. The Governments' response to its consultation
on consumer credit made clear that its priority for reform was
through 'self regulation'. Building on that approach, the Minister
told us:

We are now engaged in intensive discussions with
the four associations who represent over 90% of the payday lending
market to see whether or not through codes of practice we can
have significantly enhanced consumer protection. I have written
to the associations and I intend to meet them. I am making a very
clear signal to them that some of the practices that I think you
are referring to, whether it is the rollover, the continuous authority,
irresponsible advertising or a need for greater transparency,
all need to be addressed in codes of practice.[96]

69. However, problems with how the consumer credit
industry could self regulate have been highlighted to us. Professor
Iain Ramsay from the University of Kent warned:

The balance of self regulation versus regulation
clearly depends a lot on the context; I am not so confident in
an area like payday loans how exactly self regulation would work.
Who would enforce it? Would it apply only to companies that had
signed up to the code of practice? Would it be enforceable by
the Financial Ombudsman Service in terms of a norm of fairness?
There is the danger that self regulatory codes actually make the
law more opaque because you have to look at the statute, look
at the regulations then look at the code of practice, so it is
not necessarily the case that it simplifies the regulatory landscape.[97]

70. It should be noted that there is already
a code of practice for the industry. Following publication of
Consumer Focus' Report: Keeping the Plates Spinning, the
industry established a forum to draw up a Code of Practice. A
Lending Code for Small Cash Advances was launched by the Consumer
Finance Association in July 2011. However, Consumer Focus argued
that while some progress had been made which would be helpful
for consumers, "it did not address key issues for the protection
of vulnerable consumers which our research had identified".[98]
It went on to argue that:

The willingness of industry to work on self regulation
is strong but it is doubtful that the measures we would like to
see put in place will be achieved by any voluntary code. We consider
that consumers are only likely to get the full level of protection
they need from regulatory measures to both limit the number of
loans/rollovers and to oblige the industry to undertake appropriate
credit checking activities.[99]

71. When we asked a representative from the payday
loans industry, John Lamidey of the Consumer Finance Association
(CFA), what sanctions there were against any payday lender who
did not adhere to a code he stated that the current version of
its code of practice did not include "compliance monitoring
or a method of dealing with members who do not comply" but
that the latest revision would "have annual compliance monitoring
and a complaints handling system enshrined in that".[100]

72. In Canada the payday industry has established
a code of conduct which goes far further than the UK's current
version. The Canadian code amongst other things prohibits the
rolling over of loans and the issuing of multiple loans at the
same time. Interestingly, Dollar Financialthe largest payday
operator in Canada and the largest store front payday operator
in the UK through the Moneyshopis signed up to the Canadian
code[101], which supports
that it would be possible for a similarly strict code to operate
in the UK.

73. For self regulation to be effective it has
to include transparent and enforceable sanctions. We understand
that more vigorous codes of practice are under development by
the industry. The Government must ensure that self regulation
can deliver the necessary enforcement sanctions and demonstrate
that they are sufficient to protect consumer interests. Therefore,
we recommend that the Government provide us with an update on
the development of the codes of practice by the end of 2012. If
it cannot be demonstrated that self regulation can deliver the
necessary protections then the Government will need to intervene
with statutory regulation.

The use of APR

74. The standard way in which the cost of a payday
loan is measured is by using the annual percentage rate (APR).
This measurement and the way that it is calculated is set by the
Consumer Credit Act 1974. As the OFT explains on its website:

The APR must be included in credit agreements and
pre-contract information. A typical APR must be included in most
credit advertisements. This is intended to help consumers to compare
the cost of different credit deals.

The APR is based on the total charge for credit (TCC)
which includes interest and other charges which affect the cost
of borrowing - even if they are not payable under the credit agreement
itself. The APR is an annualised rate reflecting the timing of
such charges, as well as the rates and amounts.[102]

75. Both sides of the high cost credit argument
agree that using the APR as the price comparator is not ideal
for payday loans. It is believed that although companies have
to advertise the APR of a payday loan the customer is far more
interested in the actual cost.

76. The consumer money expert Martin Lewis, gave
us the following example of the difference between the perception
generated by quoting APRs and 'real' money costs might have for
short term loans:

I think first of all, to go back to basics, one of
the great problems is the APR percentages that companies are asked
to produce are a farcical nonsense when it comes to short-term
borrowing. I always use this example, [...] If we were in a pub
and you said, "Lend me £20", and I said, "I
will give you £20 but buy me a pint next week," and
the pint cost £3, that isI will not test you143,000%
APR. That is the problem with APR regulation on short-term borrowing
because £3 on £20, over a week, if you compound it over
a year becomes 143,000%.

The first problem here is that these lenders are
advertising 5,000%. It means nothing and it is not putting people
off. There is no price competition in this market, because if
there were then nobody would do it. The current idea of comparison
sites, which is a plan, is relatively weak; it is not about price.
What we first of all would do is incorporate total cost. This
should all be about cost; get rid of ratesrates are nonsense.
Companies should have to dictate the cost of the loan, and there
should be a limit on the total cost of any individual transaction,
which includes rollovers[103]

I think total cost, based on a number of examples,
is a good idea. There are ways to formulate this within the industry.
That is the way it has to go on short-term lending. It has to
be: if you borrow £100 over two weeks, you will repay this
amount. That is what we need to be telling people. How would you
compare if you were doing it yourself? You would ask yourself
that question. If I borrow £100, and I pay it back in two
weeks, how much would it cost me? If I pay it back in another
two weeks later, how much will it cost me? It is the simple and
bleeding obvious answer, if I am honest.[104]

The customer actually sees it in terms of pounds
and pence, and they make that comparison with others in the same
sector in terms of pounds and pence. Also, when they talk in
terms of the difference between a payday and an unauthorised overdraft,
they have no APR to compare with, so again, they see it in terms
of how much they have had to pay at the bank as opposed to paying
for a payday loan. I think measuring it in terms of the cost
in pounds as opposed to a percentage APR would be very beneficial.[105]

78. When we questioned the Minister he said that
while there were "no direct plans" to introduce new
measures he acknowledged that the APR measurement was "often
not be the most informative measure of the cost of credit".[106]

79. We recommend that APR should no longer be
used to measure and compare the cost of payday loans. Instead,
the total cost of the loan should be made clear; for example if
£100 is borrowed and £150 is paid back including interest
and fees then this total amount is the figure that should be advertised.
It also should include how much it costs if paid back a week late,
2 weeks late and so on, so consumers are clear of the reality
and penalties of late payment.

Credit Unions and the Post Office

80. Credit Unions in Britain are small, co-operative
financial institutions. There are currently approximately 400
credit unions in the UK serving about 900,000 people.[107]
The Credit Union Act 1979 sets down the Credit Union operating
principles in law:

The promotion of thrift among
members;

The creation of sources of credit for the benefit
of members at a fair and reasonable rate of interest;

The use and control of their members' savings
for their mutual benefit; and

The training and education of members' in the
wise use of money and in the management of their financial affairs.[108]

81. In the past decade, British credit unions
have trebled their membership and assets have expanded four-fold.
The Association of British Credit Unions Ltd (ABCUL) informed
us that the sector has made over half a million loans in the last
four or five years, all in the £200 to £400 area.[109]

82. As this growth has taken place, the role
that credit unions can playboth in providing equitable
financial services to the whole of their communities and providing
diversity in the financial services sectorhas been increasingly
recognised by government and policy-makers. The Coalition's Programme
for Government committed to promoting mutuals as part of a diverse
financial services system. The Department for Work and Pensions
is currently conducting a feasibility study, the outcome of which
will determine whether and how an earmarked £73 million credit
union modernisation and expansion fund will be invested in the
credit union sector. In addition, the Government recently introduced
a Legislative Reform Order to amend the Credit Unions Act 1979
intended to enable credit unions to reach out to more people.[110]

83. Joanna Elson from the Money Advice Trust
argued that credit unions were a very useful source of both affordable
credit and simple savings. However, she acknowledged that this
was not at the scale that would be needed to cope with complete
demand across the UK. In that context, she welcomed the Department
for Work and Pensions' work with the credit unions on modernising
and growing the sector but, warned that "you cannot wait
for that to happen before you sort out some of these other problems".[111]

84. Professor Iain Ramsay of the University of
Kent also noted that credit unions were "a tiny part of the
UK market at the moment" and that whilst he was in favour
of encouraging them to grow in terms of providing an alternative
form of competition in the market he believed that "they
can only be one part of the solution to high-cost credit."[112]

85. Mark Lyonette, Chief Executive of ABCUL was
also of the view that credit unions were not in the best position
to compete with the "high-tech, payday-lending Wonga model"
because they were not able to match the "sophisticated automation
and credit scoring behind the scenes" which were deployed
by those companies.[113]
However he highlighted the situation in the United States where
credit unions have now successfully entered the payday loan market:

I should say that about 90 million people use credit
unions in the States. They angsted for a long time over whether
they should offer an alternative to the payday lending product.
In the end, a number of them did at a much lower cost with the
same featuresfor example, eight days, ten days or the end
of the month.[114]

86. The Minister was encouraging on the role
of the credit unions, in particular on the potential for them
to work within the Post Office network. He highlighted the work
currently being done by the Department for Work and Pensions on
credit unions and the fund made available by Government to invest
in the credit union sector over the spending review.[115]
He was of the view that:

If you could access credit union payments over the
Post Office network, and they were there and able to advertise
credit union products, I think it would be the biggest shot in
the arm imaginable for the credit union sector.[116]

87. There was a suggestion that Credit Unions
should be signposted from payday lenders so that people are aware
that there is a lower cost alternative. ABCUL explained:

In the same way that there is an obligation in the
debt management industry to make people aware that there might
be cheaper or free alternatives available, it might be something
that is worth thinking of in this area. You would not be able
to recommend any particular institution; it would be more like
a wealth warning where you actually suggest that there might be
cheaper ways to do this.[117]

88. Credit Unions have a valuable role to play
in this market and their role needs to be highlighted by Government.
We support the argument that the Post Office network has huge
potential to work with the Credit Unions to provide short-term
loans at a lower cost than commercial payday lenders. We recommend
that the Government set out in its response, how it proposes to
use Post Offices as a vehicle to expand the Credit Union market.

Social fund

89. The current welfare system provides grants
and interest-free loans from the discretionary part of the Social
Fund to help people on low incomes with costs which are difficult
for them to meet from their regular income; for example to buy
school uniforms or to replace white goods. Grants and loans are
currently administered by Jobcentre Plus. The budget for the discretionary
Social Fund in 2011-12 was £732 million.[118]

90. Under the Welfare Reform Bill, the discretionary
Social Fund will be abolished in April 2013. Instead, in England,
a new system of Local Welfare Assistance will be introduced, to
be administered and provided by local authorities.

91. Loans will be replaced by "payments
on account". These will be recoverable payments intended
to help towards meeting the expenses which are difficult to budget
for out of normal benefit income or for which the claimant has
been unable to save, or to deal with fluctuations in expenditure
throughout the year, for example where children in the household
who would normally have free school meals are on summer holidays.

92. The Government says that the reasons for
the change include the increase in the cost of loans and the need
to focus discretionary payments on the most vulnerable people.
The Government also believes that a discretionary system is likely
to be more effective if it is administered locally and "linked
to other support services" rather than being centrally administered.[119]

93. Martin Lewis described what was happening
to the social fund as "just horrendous"[120]
and highlighted what he saw as serious problems with the Government's
approach:

It is going to become discretionary for local councils
going forward, and I do not see, with the budget cuts at the moment,
that they are going to be offering them. What we used to do is
have a state-funded social fund that was there to supply short-term
lending for people in emergencies, and in the midst of the payday
loan boom, we are taking it away. I do not get that.[121]

94. However, the Minister said that the argument
that the inability of the benefits system to deliver loans was
driving people towards payday loans had not been raised with him.
However, he undertook to "talk to DWP colleagues" about
this matter.[122]

95. We are concerned by anecdotal evidence which
suggests that the removal of the Social Fund will push people
towards payday and other high cost lenders. In its response to
this Report, we will expect the Department to set out what meetingsat
Ministerial and Official levelhave already taken place
on this issue; and to set out what joint plans Ministers from
BIS and the DWP have put in place to ensure that the Social Fund
and the proposed 'local welfare assistance' will protect the most
vulnerable from payday and other high cost lenders or loan sharks.